Currency and FX Swaps
A currency swap is a contract in which two parties exchange interest payments — and often principal — in two different currencies. It lets companies borrow in one currency while servicing debt in another and hedges exchange-rate risk.
A European company needs dollars to build a US factory, but it can borrow more cheaply in euros. A currency swap lets it borrow euros and effectively convert them into dollar debt. Currency swaps are also how central banks supply dollars abroad in a crisis. This entry explains how currency and FX swaps work, with examples.
- Category
- Derivatives
- Reading time
- 3 min
- Also called
- Currency swap, Cross-currency swap, FX swap
- Updated
Currency swaps in plain words
A currency (cross-currency) swap is a derivative contract between two parties exchanging interest payments, and sometimes principal amounts, in different currencies.1
Swap contracts let two parties exchange revenue streams from assets each holds.2
A company can use a USD/GBP currency swap to hedge exchange-rate risk.2
How a cross-currency swap works, step by step
Exchange principal at the start
At today's exchange rate.
Swap interest payments
Each side pays in the other's currency.
Fixed or floating legs
Any combination.
Re-exchange principal at maturity
At the original rate.
Exchange-rate risk removed
For the hedged amount. See Currency Risk.
Counterparty risk remains
See Counterparty Risk.
Worked examples
Example 1 — Funding a foreign project
Dollar fundingA European firm swaps €90m for $100m at 1.111 $/€ for 5 years.
| Start | Gives €90m, receives $100m |
| End | Gives back $100m, receives €90m |
Currency swaps can include exchanging principal amounts in different currencies.1
Example 2 — Interest legs
Swapped interestThe firm pays 5% on $100m and receives 3% on €90m each year.
| Pays | $5m |
| Receives | €2.7m |
The interest payments are exchanged in the two currencies.1
Example 3 — Hedged against a currency move
€10m savedThe euro weakens to 1.00 $/€ by maturity.
| Unhedged cost of $100m | €100m |
| Hedged cost | €90m (locked) |
| Saved | €10m |
Locking the exchange rate removes currency risk on the principal.2
Cross-currency swap vs FX swap
| Aspect | Cross-currency swap | FX swap |
|---|---|---|
| Term | Years | Days to months |
| Interest exchanged | Yes, periodically | Built into the forward rate |
| Typical use | Long-term debt hedging | Short-term funding, rolling FX |
| See also | Forward points | Forward Points |
Who uses currency swaps
Multinationals
Funding foreign operations. See Currency Risk.
Banks
Managing currency funding gaps.
Investors
Hedging foreign bonds. See Hedging.
Central banks
Dollar swap lines in crises. See Central Bank.
Advantages and disadvantages
Advantages
- Hedges long-term currency risk.
- Access to cheaper foreign funding.
- Customisable.
Disadvantages
- Counterparty risk.
- Complex accounting.
- Gives up gains from favourable moves.
Going deeper
Read as far as you need. Each level builds on the one before it.
Two currencies, two legs
Beginner
Each party pays interest in one currency and receives it in another.1
FX swaps
Intermediate
Short-term FX swaps combine a spot trade with a forward trade in the opposite direction, rolling currency positions. See Forward Contract.
Swap lines
Advanced
In crises, central banks use currency swap lines to supply dollars to banks abroad, easing global funding stress. See Eurodollars.
Common mistakes
Confusing FX and currency swaps
Different terms and structures.
Ignoring counterparty risk
Large principal amounts are at stake.
Hedging more than exposure
Over-hedging creates new risk.
Forgetting basis costs
Cross-currency basis affects pricing.
Check your understanding
Test yourself before moving on. Each answer comes with an explanation.
Key points to remember
- Currency swaps exchange payments in two currencies.
- Principal is often swapped at the start and end.
- They hedge long-term exchange-rate risk.
- FX swaps are a short-term cousin.
- Central banks use swap lines in crises.
Frequently asked questions
Why would a company use a currency swap?
Are currency swaps traded on exchanges?
What are central bank swap lines?
Further learning
- Swap
The swap family.
- Forward Contract
Building blocks of FX swaps.
- Eurodollars
Offshore dollar funding.
Sources
This article is written in our own words. The sources below support the specific facts, rules and figures marked with a number in the text. Links open the original publisher’s page.
- Corporate Finance Institute. Currency Swap Contract (opens in a new tab) Checked .
- Corporate Finance Institute. Swap Contracts (opens in a new tab) Checked .
Educational content, not financial advice. Examples use hypothetical prices and simplified costs; actual fees, margin rules and regulations vary by broker, market and country. We are not affiliated with any publisher linked above. Last reviewed . Report an error or request a source credit.